This is one of the most important psychological patterns in the stock market. Investors always try to look into the future. If everyone expects a company to present a great result, they start buying the stock weeks in advance. The price rises on the rumor itself.
"Faith is the substance of things hoped for."
— Florence Scovel Shinn
When the news is finally presented, all expectations are already priced in. There are no more buyers left, because everyone who had faith has already bought. Then the smart investors start selling to take profit, and the price falls despite the good news.
The lesson: Never buy a stock just because good news arrives today. Instead, ask yourself: Did the market know this yesterday? If the answer is yes, the news is already old.
How to use this?
- Be careful about buying stocks right before important events that everyone is looking forward to.
- Monitor the expectations in the market, not just the news itself.
- Learn to spot when a positive news event leads to a drop – it is often a sign that the stock is overbought.